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TiVo Cable TV Strategy Raises Questions

A new report from The Diffusion Group proposes TiVo's new plan to seek "mass deployment" of the TiVo service through cable service providers, while likely to help boost revenue, will do little to generate profit. According to TDG's new report, Can TiVo Survive? A Case Study in the Perils of First-to-Market Innovations, former CEO and co-founder Mike Ramsay warned board members and fellow executives in January 2005 that licensing deals with digital TV operators would not be the best way to grow TiVo's business. In fact, said Ramsay, "...the economics are not very attractive."

"A key reason for TiVo's recent shift in leadership was disagreement regarding to what extent TiVo should be courting video service providers," said Scott Kipp, research analyst with The Diffusion Group and author of TDG's latest report. "As DirecTV phases out shipments of TiVo DVRs, TiVo will be forced to come to terms with an increasingly competitive market flooded by free DVRs from video service providers. Although TiVo will look to new cable and satellite relationships to fill the gap, these dealings will generate far too little revenue to sustain the company for the long-term."

Kipp cites two specific challenges with this service provider-centric strategy. First, TiVo will have limited control over end users and likely end up with gross revenue of around $1 per subscriber per month. Similar to how DirecTV controls its subscribers, cable operators will seek to retain control of the DVR and not let TiVo download movies to the set-top boxes. Video service providers will not cede control of this aspect of their business to TiVo, thus relegating TiVo to a secondary position in such relationships.

Second, cable companies are planning to base their set-top box implementations on CableLab's JAVA-based OCAP standard while TiVo features a proprietary Linux-based implementation. Yes, these differences can be overcome, but significant integration effort is required for compatibility at the application layer. TiVo will have to thoroughly redesign their software to work with OCAP, changes which many in the cable industry doubt that TiVo will undergo given its stubborn ways and proprietary leanings. It will take several man-years of software development to make its DVRs compatible with the cable industry.

"This is not to suggest that relationship with cable, satellite, and IPTV video service providers should not be an important component of TiVo's strategy," continues Kipp. "However, to generate sufficient profits, TiVo will need to focus a tremendous amount of energy on its primary or standalone subscribers who pay $12.95/month to TiVo for its full service and unique user interface. VSP partnerships will help generate some revenue and certainly get the TiVo brand in front of many consumers. However, in order to grow revenue and profits TiVo will need to leverage these relationships to sell its stand-alone hardware and service."

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